Wednesday, 21 December 2016

The EU's future trade policy starts to take shape: the Opinion on the EU/Singapore FTA

Professor Steve Peers

What is the scope of the EU’s
powers over trade agreements? The issue has been disputed for decades in the
case law of the ECJ, for it has a significant impact on the allocation of
powers between the EU and its Member States as regards external economic policies.
A number of Treaty amendments over the years – in particular the Treaty of
Lisbon – have amended the rules.

The issue has gained added
salience given the controversies surrounding some EU trade negotiations (in
particular with Canada and the USA), and the trade talks between the UK and EU
in light of Brexit. Today’s opinion
of an ECJ Advocate-General is not binding, but is very thorough and will likely
have a significant impact on the Court’s final judgment, expected in the
spring.

This post will summarise the
lengthy opinion succinctly and suggest its likely implications for the FTAs
with Canada, the USA and the UK in particular. For further reading, see the
earlier posts on this blog on the background
to the Opinion and on the hearing
before the ECJ.

Background

The Court has been asked to rule
on whether the various provisions of the EU’s draft trade deal with Singapore fall
within the scope of the EU’s exclusive powers, or whether powers are shared
with the Member States, or whether only Member States can conclude them. If the
EU only can conclude them, there can be no national ratification and also
probably (depending on the exact content of the agreement) the EU will approve
the deal by qualified majority, ie Member States will not have a veto.

If both the EU and its Member
States can conclude the provisions, the agreement is ‘mixed’, but the EU has a
choice to conclude the agreement without the Member States, if a qualified
majority (assuming, again, that no veto applies due to the subject matter)
agree to this.

If an issue is within exclusive
Member State competence, then Member States must be parties to the treaty in
order to conclude it. National ratification, and a de facto national veto for each Member State, therefore applies.

When is a power exclusive to the
EU? Article 3(1) of the Treaty on the Functioning of the European Union (TFEU)
lists a number of powers that are inherently exclusive, including the common
commercial (ie trade) policy (CCP) and fisheries conservation. The CCP is
further defined in Article
207 TFEU: it particularly applies to ‘goods and services’, the commercial
aspects of intellectual property’ and ‘foreign direct investment.’ The EU/Singapore
case concerns the interpretation of each of these aspects.

Besides Article 3(1), Article
3(2) TFEU goes on to provide that exclusive EU powers over an international
treaty can also derive from the exercise of EU internal powers, in three cases:
(a) ‘its conclusion is provided for in a legislative act of the Union’ or (b)
it ‘is necessary to enable the Union to exercise its internal competence’, or (c)
‘in so far as its conclusion may affect common rules or alter their scope.’ The
EU/Singapore case concerns the interpretation of both (a) and (c), which I will
refer to as the ‘legislative authorisation’ ground and the ‘affect common rules’
ground. (Note that ground (b) is rarely
applied, as the ECJ case law interprets it very narrowly).

Summary of the opinion

The Commission argues that the EU
has exclusive competence to conclude the deal. It’s supported by the European
Parliament, which will have the power to consent to the deal as long as part of
it relates to the CCP, or indeed to most other EU powers. Member States argue
for mixed competence of much of the agreement, and exclusive national
competence for some parts of it.

In general, the Advocate-General
argues that much of the agreement is solely within the EU’s exclusive powers,
mostly (but not entirely) as part of the CCP. A significant part falls within
the EU’s mixed competence, while a small part is purely national competence.

First of all, she makes some
general points about the scope of the CCP. She restates prior ECJ case law: the
CCP applies to a measure which regulates and has direct effect on trade; mere implications for trade are not
sufficient. She also interprets the exceptions in Article 207(6) TFEU, which
states that the CCP ‘shall not affect the delimitation of competences between
the Union and the Member States, and shall not lead to harmonisation of
legislative or regulatory provisions of the Member States in so far as the
Treaties exclude such harmonisation.’ In her view, this clause must be narrowly
interpreted and has limited effect: for instance, it does not restrict the EU
from agreeing measures on trade in culture and health services, as long as it does
not harmonise the laws on those issues within the EU.

The opinion does not address the
potentially important exceptions in Article 207(4) TFEU, which call for
unanimous voting where ‘unanimity is required for the adoption of internal
rules’ or ‘(a) in the field of trade in cultural and audiovisual services,
where these agreements risk prejudicing the Union's cultural and linguistic
diversity’, or ‘(b) in the field of trade in social, education and health
services, where these agreements risk seriously disturbing the national
organisation of such services and prejudicing the responsibility of Member
States to deliver them.’

On the other hand, the opinion
does discuss the exception in Article 207(5) TFEU, which states that the CCP
does not apply to agreements concerning transport. As a general rule, the
Advocate-General argues that this exception applies whenever a treaty has rules
‘specifically concerning transport’. The further implications of this are
discussed below.

The Opinion then examines the
specific provisions of the EU/Singapore deal. First of all, the opening provisions of the FTA,
referring to the creation of a free trade area, fall within the scope of the
CCP. Next, following pre-Lisbon case law, the Opinion concludes that the FTA
provisions on trade in goods are
also within the scope of the CCP (Paras 144-155).

Thirdly, the Opinion examines the
FTA provisions on services,
establishment and e-commerce (paras 195-269). In general, other than transport
issues, these fall within the scope of the CCP powers over services. In
particular, immigration of service providers falls within the scope of the
services powers, and therefore not under the immigration powers of the EU,
where the UK and some other Member States have an opt-out (para 203). Financial
services are covered by the CCP (para 204), since its scope is not dependent on
prior harmonisation of the relevant law by the EU (unlike Article 3(2) TFEU). Professional
qualifications are also covered (para 205).

As for the transport exception from the CCP, it applies not just to the
services themselves, but those indissolubly linked to those services – ie cargo
handling, transport repair, and computer reservation – but not to customs
clearance, since that applies also to trade in goods. But does the EU have exclusive power over the
transport issues, by applying Article 3(2) TFEU instead? As regards aircraft
repair, the ‘legislative authorisation’ ground doesn’t apply, since the EU
legislation creating an aircraft safety agency doesn’t address this issue in
detail. As for the ‘affect common rules’ ground, there is insufficient internal
harmonisation as maritime transport, air transport (other than computer
reservation systems), and inland waterways – but sufficient internal harmonisation
as regards road and rail transport for the powers to become exclusive as
regards the EU/Singapore FTA. Other aspects of transport remain a shared
competence.

Fourthly, on the issue of investment (paras 305-398), the opinion
again examines both the CCP and Article 3(2) TFEU. The opinion offers a definition
of the EU’s CCP powers over foreign direct investment: investments ‘which serve
to establish or maintain lasting and direct links, in the form of effective
participation in the company’s management and control, between the person
providing the investment and the company to which that investment is made
available in order to carry out an economic activity. In applying that
definition, I consider that the fact that the direct investor owns at least 10%
of the voting power of the direct investment enterprise may offer evidentiary
guidance but is certainly not determinative’. Crucially, the opinion argues (paras
324-342) that the CCP power covers the issue of investor protection.

As for other forms of investment –
referred to as ‘portfolio investment’, it was agreed that the CCP didn’t apply.
Could Article 3(2) TFEU apply, though? Here, there was no legislation on the
issue, but there are EU Treaty
provisions on capital movements to non-EU countries, which the Commission
believes fall within the scope of the ‘affect common rules’ ground. However,
the Opinion argues in principle that this ground for exclusive competence can
only apply where the prior EU harmonisation results from legislation, not the
Treaty. But the EU and its Member States still shared competence on most investment
issues, except for the termination of bilateral investment treaties.

Fifth, on the issue of government procurement, previous prior case
law said that the CCP only applied to procurement relating to goods and limited
aspects of services. The Opinion concludes that in light of the Lisbon Treaty
provisions made to the scope of the CCP, that EU power now fully applies to
government procurement issues – other than those within the scope of the transport
exception (paras 401-408).

Sixth, the Opinion examines the
scope of the CCP power relating to intellectual
property (paras 424-456). Although prior case law had concluded that the
CCP fully applied to the ‘TRIPS’ (ie the intellectual property deal forming
part of the World Trade Organisation system), the Opinion argues that this
ruling did not necessarily apply by analogy to intellectual property rules in
the EU’s FTAs (IP rules found in FTAs are often called ‘TRIPS+’ clauses).

To determine if a TRIPS+ clause
falls within the scope of the CCP, the test (para 435) is not based on the remedy
which applies, but rather whether: the substantive obligation governs trade
rather than harmonises IP law; there is a direct and immediate effect on trade;
and if the measure aims to avoid distortions to trade caused by monopolies. Again,
application of the CCP does not depend on whether the EU has harmonised an IP
issue internally. The Opinion also argues that rules on court procedures do not
necessarily fall outside the scope of the CCP.

Appling this test to the facts:
enforcement and plant variety rights are part of the CCP, but some parts of the
draft EU/Singapore are not: namely moral rights, which also are not covered by Article
3(2) because the EU has not harmonised them internally. But the EU does have shared
competence over this issue, since it could harmonise them on the basis of its internal
market powers.

Seventh, the Opinion looks at competition law (paras 459-466). The
FTA rules on this issue fall within the scope of the CCP, since they extend EU
rules to Singapore and there is a a strong link with trade in goods and
services.

Eighth, the Opinion looks at the FTA
provisions on environment and
sustainable development (from para 478). Here the rules on renewable energy
fall within the scope of the CCP, since there is a strong link to trade and
investment. However, the rules on labour and environmental standards are not
closely linked with trade, so the EU shares competence with its Member States
(no one had made an argument that Article 3(2) applied). The rules on fish stocks
fell within the scope of another EU exclusive competence: fisheries
conservation.

Finally, the rules on transparency and judicial review were
ancillary to the substantive provisions of the FTA (paras 508-13). So were the
rules on dispute settlement and
mediation (paras 523-44); here the Opinion points out that the
controversial rules on investor-state
dispute settlement were not at issue in this case (para 536). (Note that Belgium
has promised to ask the Court about the relevant provisions in the EU/Canada
FTA). And the final provisions are either accessory or minor, so change none of
the legal assessment (paras 548-553).

Comments

The Advocate-General’s analysis as
regards goods, services and intellectual property is unsurprising in light of
prior case law. However, the analysis as regards the fresh issue of investment
is more disputable. Her case that investor protection falls within the scope of
the CCP is convincing, on the grounds that people might not invest in the first
place without adequate protection (ie, there is a link back to market access). On
the other hand, the analysis relating to portfolio investment puts form over
substance: why should it matter that ‘common rules’ derive from the Treaties,
rather than EU legislation? Also, the termination of bilateral investment
treaties should more logically be seen as the corollary of the exercise of the
EU’s other (exclusive or shared) competence, rather than a purely national
competence. And it is unfortunate that the Commission missed this opportunity
to ask the Court to rule already on the controversial investor-state dispute
settlement rules.

What are the implications for
other FTAs, and for Brexit? That depends in part on the exact commitments in
those other treaties, since this Opinion analyses the commitments that would be
made under the EU/Singapore FTA, and commitments under other treaties might
differ. In particular, it’s conceivable that other FTAs might arguably require
unanimity on the basis of Article 207(4) TFEU, discussed above, which was not
at issue in this case.

In general, for other FTAs it
seems likely that a mixed agreement may
be necessary, in light of the interpretation here relating to the transport
exception, portfolio investment, and labour and environmental standards. Apart
from the question of termination of investment treaties, then, it will be a
purely political question whether Member States are content to agree those trade
treaties on behalf of the EU alone, or will continue to insist (as they
traditionally have done) on Member States being parties as well.

As for a post-Brexit FTA in
particular, different issues may arise. The UK and the EU might not have any
interest in negotiating measures relating to investment or intellectual
property, at least in the form that EU FTAs now address them. So if the UK and
EU want to focus on goods and services only, then the EU’s exclusive CCP
competence would apply except as regards transport – and the EU often signs separate
transport agreements with non-Member States. It could be argued that a deal might need unanimity
on the basis of Article 207(4) TFEU, but the counter-argument is that a post-Brexit
trade deal would simply be preserving (some of?) the existing UK market access
into the EU, so could not threaten health or audiovisual services.

Even on transport issues, or as
regards labour and environmental standards, case law suggests that exclusive
competence on the basis of Article 3(2) applies where the EU seeks to extend
its own laws to non-EU states. If the UK is willing to sign up to a treaty that
preserves market access in return for compliance with EU rules, it would follow
that today’s opinion – if followed by the ECJ – has possibly drawn a road map
for the negotiation of an agreement based on free trade in goods and services
and compliance with selected EU legislation which could avoid national
ratification and (depending on the subject matter) national vetoes.